South African rand drops to record low after ratings downgrade

The South African rand has fallen to a record low after the country’s investment status was downgraded to junk by credit ratings agency Moody’s on Friday.

The currency dropped as much as 2.5% to 18.09 per US dollar following the downgrade and fell a further 1.5% to 17.87 in Monday morning trading. Meanwhile, yields on 10-year government bonds climbed 56 basis points to 12.26%.

Moody’s downgraded its rating one notch to ‘Ba1’ from ‘Baa3’ and maintained a negative outlook, meaning another downgrade could follow if the economy performs worse or government debt rises faster than expected.

Unreliable electricity supply, persistently weak business confidence and investment, and labour market rigidities were referenced by Moody’s as primary constraints on the South African economy.

The downgrade piles further pressure on the economy which is already in recession and braced for a further hit from the COVID-19 (coronavirus) pandemic. Operations across several key industries are being suspended during a government-led three-week lockdown.

“The unprecedented deterioration in the global economic outlook caused by the rapid spread of the coronavirus outbreak will exacerbate South Africa’s economic and fiscal challenges and will complicate the emergence of effective policy responses,” said Moody’s.